Q3 2023 Geospace Technologies Corporation Earnings Call

Speaker 1: The increase is driven largely by water meter cables and industrial sensor products.

Also during the quarter, our Aquana subsidiary announced the release of its actuator valve serial, ABS, a remote shutoff valve designed to reduce the cost of operations and enhance the safety of employees for water utilities.

With the continued adoption and updates of smart water meter systems by domestic municipalities, we believe the long-term increase in demand for these adjacent market products will persist.

Our emerging market segment contribute a small but strategic portion of revenue during the three-in-night month periods, primarily related to previously announced government and defense industry contracts.

Speaker 2: What.

Speaker 3: Good day and welcome to the Geospace Technologies third quarter 2023 earnings conference call.

Speaker 3: Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Kurta, the company's chief financial officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call.

Further efforts are underway to secure additional contracts for perimeter security as well as to pursue the new energy transition applications, such as carbon storage, geothermal, and mining. There may be more clarity on some of these endeavors in the near future.

With that, I'll now turn the call over to Robert to give a little more financial detail on our third quarter performance.

Speaker 3: At this time, all participants have been placed in a listen only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue.

Thanks Rick. Good morning. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning.

And yesterday's press release for our third quarter in a June 30, 2023, we reported revenue of $32.7 million compared to last year's revenue of $20.7 million.

The net income for the quarter was 3.2 million or 24 cents per diluted share Compared to last year's net loss of 6.6 million or 51 cents per diluted share

For the nine months in the June 30, 2023, we reported revenue of 95.2 million compared to revenue of 63.4 million last year.

Our net income for the nine month period was $7.8 million or $59.00 per bill to each share compared to last year's net loss of $14.8 million or $1.14 per bill to each share.

Our Oling Gas Market segment produced revenue of 17.7 million for the three months into June 30, 2023. This compares with revenue of 9.5 million for the same period of the prior fiscal year and increase of 86%.

For the 9-look period, the segment contributed revenue of 56.2 million versus 34.3 million for the same period last year and increases 64%.

The increase in revenue for the three month and nine month periods are due to higher utilization of ROBX rental fleet and higher demand for marine equipment and seismic sensors.

The nine month period increase in revenue is partially offset by decrease in demand for our wireless exploration products.

Our Jason Market Segment Revenue is the following.

Our industrial product revenue for the third quarter of fiscal year 2023 was 11.7 million and increased 56% over the third quarter.

2022. The industrial products time-up revenue is 29.3 million in increase over the same period in 2022 of 58 percent.

Both periods revenue increases are due to higher sales of our water meter cable and connector products and higher demand for industrial sensor products.

Imaging product revenue for the third quarter was 3.2 million compared to last year's revenue of 3.5 million.

The 9 month revenue for imaging products is 9.1 million versus 9.8 million. One can compare to the same period in 2022.

Finally, revenue for our emerging market segment for the third quarter was $109,000 compared to $135,000 for the same prior year period.

The 9 month revenue for this segment for the fiscal year was 393,000 compared to 571,000 for the same period in 2022.

Our emerging market segment continues to perform on contracts with DARPA, which was announced earlier this fiscal year in other governmental agencies or contractors.

Excluding non-cash decreases to the fair value of contingent turnout, one of the liabilities reporting in a fiscal year 2022, are operating expenses modestly increased by 300,000 for the third quarter of 2023 and increased by 700,000 for the nine month period.

The increase in operating expenses for the three month period is due to increased sales, expense, and research and development costs.

The slight increase in operating expenses for the nine month period is due to higher selling expenditures slightly offset by lower research and development expense.

Our nine months net cash investments into our rental fleet is 6.2 million in investments into property plant and equipment or 1.9.

Our balance sheet at the end of the third quarter reflected 27.3 million of cash and cash and equivalent. We are also happy to report we entered into a new credit facility on July 26, which will provide an additional 15 million in liquidity.

Lastly, we own real estate holdings in Houston and around the world that are own free and clear without any leverage.

That concludes my discussion and I'll return the call to Rick.

Thank you, Robert.

In conclusion, GSB has delivered one of its most financially successful quarters in many years, with quarterly revenue outpacing that of the past nine years.

We also boosted liquidity to approximately 42 million through a completed credit agreement that Robert mentioned with Wood Forest National Bank. However, we don't anticipate a need for borrowing and the foreseeable future. Looking forward, we expect to see favorable performance throughout fiscal year 2023 and into 2024, even though laws and some elements of our commerce may occur. This concludes our prepared commentary, and so I'll now turn the call back over to Todd for any questions from our listeners. Thank you. The floor is now open for your questions. At this time, if you have a question or comment, please press star one on your telephone keypad.

If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we do ask that you pose your question that you pick up your handset to provide optimal sound quality.

Thank you. We'll take our first question from Bill Bicellum with Pete and Capitol. Thank you. I'd like to start with comments in the release relative to the OBX rental fleet being near full utilization. And yet we have the Marinor contract that's coming up. So the question.

that I have is is that Mariner contract incremental to OBS being fully utilized or are some of those OBS contracts ending and this will be replacing the revenue from those those contracts that are ending.

Hi Bill. The Mariner contract is actually fulfilling additional demand for our ocean bottom node rentals.

So the OBX 750s, which are the current rental inventory, are the ones that are currently in near full utilization. And there'll always be gaps here and there that occur as these jobs don't necessarily tie one right into the other. But the Mariner system is satisfying completely new demand.

And it's an OBX that full utilization is maintaining. And as you said, it quasi full utilization.

And as a result, as we look forward, there would be revenue upside from the rental part of the business.

And as a result, as we look forward, there would be revenue upside from the rental part of the business. Yes, I think so.

Okay, congratulations. That's potentially really significant. And then let me shift to a quantum, if I may. I don't recall much discussion in the past about geothermal and mining and I believe the press release specifically called out.

near future opportunities for both geothermal and mining along with carbon capture. Would you dive into those areas in as much detail as you can, please?

Yeah, I can't go into too much detail. Those are new developments that are underway and have only appeared recently. The quantum team is hard at work and you know the carbon capture issues that have been popping up here and there and part of that consortium work up in Canada.

has yielded a lot of knowledge amongst the energy transition areas of where say dark can actually play a significant role above and beyond carbon capture. So that being said, new discussions have started on some of these other topical areas, including geothermal and mining.

And that team is busy trying to work out, you know, and work through those discussions to see what it leads to. And again, we won't know more until the future because these are rather new developments.

And if Mark is on the call, would he be able to walk us through and the geothermal in particular? What the problem is that the system would be solving for?

Well in general it's all micro seismic activity. So all of these things, you know, and in geothermal too, you're trying to inject water and heat it up. And so you need to make sure you're leaving all structures in place without, you know, interfering with their integrity.

So there's considerable things and some of the new mining techniques that are underway where you similarly want to monitor this precise micrissized mechanactivity to know how, where things stand. So that's essentially, you know, the problem statement that say to our can solve. And Rick kind of taking that one step further. So the

geothermal in particular would be similar to a water re-injection well with oil and gas drilling wanting to monitor what's happening when when you're putting fluid back into the earth.

Certainly by analogy, I think.

Yes, okay, great. Thank you and congratulations on a really nice court. Thanks, I will. And happy birthday. Thank you.

Once again, if you would like to ask a question at this time, please press star one.

We'll take our next question from Michael Melby with Gate City Capital.

Hi, Mike. I was hoping you could expand on your industrial products segment or sub-sagment within adjacent markets. And it had a really good quarter and it had a really good year. And you've described it as industrial center, industrial sensors and water meter cables. Can you give the audience a little more color on what's involved there? The size of the market, the growth potential and I take as a corner has not contributed much yet. I think it would be helpful for your investors to understand more about the potential here and what's led to the...

what we're seeing is the result of the expansion of smart meters as a result of smart city initiatives within municipalities. You know as far as the size of that industry or that market we expected to continue to expand.

going forward and continue to grow. You know, we just think that that smart city initiative is just going to get larger and larger in the future.

The seismic sensor portion of the business this year has been a very good part, has seen some growth, but as far as that being a continual business, it's a little bit harder for us to measure and to determine. Many times the orders we receive are...

something that we haven't necessarily planned for or expected.

I think in some cases my, you know, the industrial sensors.

see some lobs. You know a lot of our businesses lumpy, I think you already know that. And certainly they are subject to that too. But you know, these centers are used in vibration monitoring of all sorts, including monitoring for equipment, vibration aspects.

And also for making semiconductors there are some special pieces of equipment and shake tables and isolation tables. They're very important in the fabrication of some of these ICs and silicon based products and they're used there. So in addition to that

and some government actually uses a vibration monitoring. I think that drove this, maybe it'll hire them, we would necessarily expect any given case, and that's exactly what Roberts is alluding to, with respect to sometimes they're just not planned and the forecaster understood until they happen.

As it relates to a quana, a quana has certainly had some sales, but most of these are pilot sales, so they're really a precursor to some of the larger orders that are anticipated from these municipalities. You can well imagine, when you've got thousands of meters that you as a municipal...

of having to roll trucks and people out, as well as just give them a better safety footprint for those employees. There's going to be some pilot programs where they try these out and make sure that they're doing what is proposed.

So the majority of sales have been in these programs and I believe are precursors to what will be larger orders.

Got it. And within water meters, the cables and connectors business, is this something you have very high market share in or sole source in any OEM?

I think we have a good market.

We'll go ahead, if you want to finish the second after that question.

And I guess was trying to understand if the revenue gains you've seen are share increases or just benefiting from the overall growth of the market.

That's really hard to pinpoint the latter half there. I mean, the fact is that the smart city movement is absolutely an escalation mode. I don't think anyone that keeps up with that industry would say otherwise. So there are a lot of municipalities that are only now beginning to get into the smart meters.

is growing. So that adds to an increased demand. I think from a market share point of view, I think that we have a very big piece of the market share. Now keep in mind that there's competitive products out there. And in fact some of our customers have some products, but they still buy emissions then try to loot from other owners all over the desert.

because of the quality that they represent and they're very cost effective for them. But in reality, you know, as smart meters came out in the initial days, they had to have some way of trying to get them connected and hooked up. It's just that we've come up with much more innovative and reliable ways of doing that and I think that does help us in the market share.

And how do you plan to bundle as the quantized rolled out? Is it an entirely separate product set or given your...

I'm sure the cable and connector business, how you plan to...

there is some overlap but i believe that it's going to have its own independent movement at the fact is that with the the upon a vows uh... and you know some of the other things were working on uh... downstream they do need to have a of you know electrical connectivity

to the radios and other components that are associated with smart metering and now these smart valves. So they will use our connector certainly in that regard and there is that overlap. It's also nice too because much of the customer base for these products is going to have significant overlap. But I think Aquana is going to really demonstrate its own value into

or the property management, multi-family property type installations. So, you know, that's something different than the utility market. That's true, too.

Well, I mean, we wouldn't have bought them if we didn't think there was significant opportunity there. So really, it's a matter of just how fast we can increase and get that developed market going. That's what these pilot programs are intended to do. That's what all our sales efforts and marketing efforts are intended to do in the way of getting the word out. But no, we don't give guidance in that regard and won't in this case either. And the operating margins in the segment are attractive.

Were there one time things maybe you alluded to that possibly impacted that or can margins remain I think part of what it contributed to that we recently had a price increase for water meter cables

an

I think that's obviously going to continue, but I don't think we're going to see any significant growth and improvement in operating margins going forward. Well, Mike, and you know where a manufacturer, so I think the more that we put the factory into a working state, and we absorb our overhead a lot more effectively.

And I think that had a lot to do with margin increases. Irrespective of other things, simply because the factories being put to work at a higher level as it relates to those parts of the organization that make those cables.

That's absolutely correct.

And I think I missed it. I think the Marinor contract starts in fiscal Q1 of next year. How long does it run for?

It's a one-year contract.

And that's for the 20 million and that includes the options you suggest in the press release too.

Yeah, the 20 million includes the options that they have of extending that contract and even purchasing the equipment.

And I get the options if those are included then, then one year in total as well.

I'm not sure I understand what you're saying.

The 20 million is over the minimum rental period of one year, yes. Thanks, and in terms of CAPEX or your investment in rental equipment, it's gone up and was wondering what we should expect in Q4 for the full fiscal year now. No part of our increased this year is related to components we have put.

We had purchased an expectation there could be a mariner contract. Now that we've signed that contract, we know we're gonna be assembling those components that are actually assembling them now into units and they will ultimately be part of our rental fleet. So that, And that would be the

You know, we kind of preemptively included some of that in, or what we spent in cash so far into the rental fleet. This quarter will do some more next quarter and end it in the first quarter of next fiscal year.

Yeah, I might have missed in the guidance, but I think for you've guided towards how much you plan to spend on cat backs in the fiscal year and in rental equipment. Do you have an update there for investors?

No, I don't have an update right now. Sorry.

I think it's in line with what was already mentioned, though, so really no major changes in that regard.

And I'm dead for me. Thank you.

And I'm dead for me. Thank you. All right. Thanks. Bye.

Thank you. We'll take our next question from Scott Bundy with Moore's and Cabot.

Good morning, guys. A couple quick questions. A couple quick questions.

Rick, the AVS product that was introduced to release, is that an pilot program or are we actually making sales?

Well, the pilot programs are sales, but they're not large quantities, as it were.

So,

You know, I have to say it's a sale. And it's a new product that extends the markets they can serve.

You answered the question. I'm confused in your press release.

No, we definitely were constrained. Our backlog was continuing to grow, and that was affecting our lead times, making it harder for us to serve the needs of our customers, which were growing in terms of quantities in the orders. So we definitely enhanced our manufacturing capabilities there, adding new equipment so that we could increase that capacity. And there's likely going to be more that we do in that regard even so.

And lastly, Roberts, roughly speaking, where did the lost carry fords of the company? They're significant. We've got many years of lost carry forwards that we have approved, but they're fully reserved on the balance sheet.

and we won't, you know, we won't. We'll reverse those.

Reserves or valuation allowances until we string many many months of Income together and it starts to see that those